Synopsis:

Credit Agricole warns that EUR/USD appears significantly overvalued, even as the euro remains a favored alternative to the USD amid predictable Eurozone policies and improving fundamentals. Upcoming inflation and PMI data may offer support, but the upside is seen as limited.

Key Points:

• Current Valuation Misaligned:
  • Both short- and long-term FX fair value models flag EUR/USD as overvalued.
  • Much of the positive Eurozone story may already be priced in.

• Macro Support for EUR:
  • EUR seen as a credible USD alternative, supported by liquidity and policy stability.
  • Eurozone resilience and nearing end of ECB easing cycle contrasts with US fragility.

• Upcoming Eurozone Data (Next Week):
  • HICP estimate expected to show inflation rebounding to 2.1% YoY (from 1.9%).
  • Core inflation seen rising slightly to 2.4% YoY.
  • Final PMIs and the ECB Sintra Forum will be key sentiment drivers.

• Medium-Term Outlook:
  • Inflation may ease again in H2 2025, consistent with ECB expectations.
  • EUR/USD likely to face upside constraints due to valuation concerns, despite favorable macro narratives.

Conclusion:

While the euro may continue to benefit from USD weakness and solid Eurozone fundamentals, Credit Agricole urges caution due to overstretched valuations. Upside in EUR/USD should be limited, barring major surprises.